We have said it before: the senior care M&A market has been an enigma. The difficult capital markets environment combined with operational distress in the industry has reduced buyer demand, increased lender scrutiny of deals and lowered values to a level that discourages potential sellers from entering the market. Headaches involving sourcing debt, soaring insurance costs and skittish (some would say fickle) buyers/lenders have made each transaction that much more difficult to complete.
Despite all of this, M&A activity is, at first glance, still at historically high levels. In the third quarter of 2023, 115 deals were publicly announced. That is down from the 140 transactions made public in Q3:22 but is equal to the average quarterly deal total of 2019, which was by most measures a healthy market with high valuations, cheap and abundant capital, and a blissful ignorance to what “COVID-19” even was.
Some of the credit for the transaction activity that keeps investment dollars flowing into properties, keeps companies growing and achieving scale, and allows owners that need to exit the industry to do so, belongs to the brokers. Firms like Blueprint Healthcare Real Estate Advisors and others focused on the seniors housing and care industry have put in the hours on relationship building, competing for new business, researching many markets, and navigating the increasingly complex closing processes to still have a chance at matching their 2021 or 2022 transaction volumes. The size of deals may be smaller, generally, but no one would say the time spent on each deal is less.
For example, year to date, Blueprint has completed 70 seniors housing and care transactions, or $1.25 billion in dollar volume, including 13 sales and $254 million of volume in the last month. That comprises 41 seniors housing deals (62 assets), 18 skilled nursing deals (38 assets), five seniors housing and skilled nursing deals (14 assets) and six capital solutions/partnership placement agreements (15 assets). The last group would not be counted for our annual broker rankings, published every February in The SeniorCare Investor, but the 64 remaining transactions are only 10 behind Blueprint’s total in 2022. And $1.25 billion of dollar volume makes 63% of the firm’s 2022 volume. Not bad for a year when buyers are less willing to make big purchases, and sellers are less willing to put large portfolios on the market.
Blueprint’s Behavioral Healthcare team, led by industry veteran Andrew Sfreddo, also closed eight transactions, including 12 assets, some of which involved behavioral buyers purchasing existing seniors housing or skilled nursing buildings for conversions. On the MOB side, they reported two single-asset transactions, but that market has significantly slowed in 2023, and Blueprint has $140 million of potential MOB sales being marketed right now.
For the senior care team to reach that kind of volume, plenty of hurdles had to be overcome and a lot of hand holding with clients had to be done. But also, most brokers, including Blueprint, are aware of how many deals have failed and how many dollars have been left on the table in the last year.
Finding a Way to the Finishing Line
So, it is worth pointing out some of the recent success stories. As one of six responses to its RFP, Blueprint was chosen by Piedmont Healthcare, Inc., Georgia’s largest not-for-profit healthcare system, to facilitate the sale of its three wholly owned skilled nursing facilities: Laurel Park at Henry Medical Center, Kentwood Extended Care and Westwood Extended Care.
Through its 2022 affiliation with University Health Care System, Piedmont Healthcare absorbed two skilled nursing facilities serving the greater Augusta market. Westwood in Evans is licensed for 149 beds and Kentwood in Augusta is licensed for 100 beds. Along with its 89-bed Laurel Park facility situated adjacent to Piedmont’s Henry Hospital in Stockbridge which was managed by a third-party operator, the facilities were slated for divestment after Piedmont decided to focus on its acute care hospitals and complementary services. Also, while Laurel Park was nearly stabilized from an occupancy and cash flow perspective, both Kentwood and Westwood experienced low occupancy and cash flow deficits, largely due to the reliance on agency labor and the lack of experience of Piedmont’s team operating SNFs. Additionally, both facilities were damaged during last winter’s storms with frozen pipes bursting, so a significant amount of capex/remediation was required.
The facilities were confidentially marketed as a portfolio. There was a ground lease to contend with and some obvious operational difficulties. However, the strong underlying performance at Laurel Park combined with Georgia’s Medicaid reimbursement rates made the operational upside at the other two locations more achievable. Thus, the marketing process generated seven competitive properties at or above pricing guidance.
PruittHealth, a Georgia-based owner/operator and incumbent manager of Laurel Park, was selected as acquirer among in-state and out-of-state investors, operators, REITs and private equity firms. Pruitt had an existing relationship with CFG which provided the acquisition financing, a critical part of closing any deal these days. Blueprint also helped negotiate and structure an upfront payment of the full ground lease for Laurel Park (which sits on the Henry Hospital campus) based on a net present value calculation of the aggregate ground lease payments. Michael Segal was the lead broker on the transaction.
In another deal, Blueprint’s Kyle Hallion represented an institutional owner in the exit of a two-asset, non-strategic relationship in Tennessee. With a near-term lease maturity looming, the seller decided it was in its best interest to divest, despite the depressed valuations for seniors housing assets in this current market. The communities featured more than 200 units of independent and assisted living, and each was well occupied with positive cash flow, but not near stabilization. Certain capital elements were required, as well.
However, despite the communities’ close proximity, Blueprint believed the buyer profile would be unique to each respective asset due to the physical plant dynamics of each community, with one asset being an 8-story tower and the other a traditional, ~50 unit AL community. So, the firm ran two separate confidential processes, including targeting assisted living turnaround specialists and alternative use investors that had the ability to pay a premium compared to seniors housing buyers. Creativity was required to close the deal during a period of rising interest rates, but it closed in phases with two separate buyers – Elevation Financial Group bought the tower and converted to age-restricted multi-family, and affiliates of MED Healthcare acquired the traditional assisted living community, with the second transaction completed in summer 2023.
Finally, the sale of a struggling skilled nursing facility on Cape Cod resulted in a new owner with a new purpose for the building. Located in South Dennis and featuring 128 beds, the facility was previously owned by a New York-based real estate investment firm. The facility was dealing with low occupancy and staffing issues, and underscores a greater issue in the sector: not every SNF can be a viable business these days.
Through a bifurcated process between Blueprint’s Seniors Housing & Care group and Blueprint’s Behavioral Healthcare group, several skilled nursing investors, as well as alternative use investors, that represented a high certainty of execution were approached. Multiple bids were procured from each buyer segment, including traditional residential real estate investors, and the finalists were a behavioral health investor and the ultimate acquirer, Housing Assistance Corporation Cape Cod. The buyer will embark on a capital expenditure plan to revitalize the asset and will ultimately convert the community into affordable housing, which is needed in the area.
Part of the transaction process was monitoring the closure of the facility as an operating skilled nursing facility, which includes a Massachusetts Department of Public Health Department mandated shutdown procedure over a ninety-day period. Despite the challenges inherent in the conversion process, this outcome was considered superior from both a pricing, at $4.3 million, or $33,600 per bed, and certainty of completion perspective. Steve Thomes, Ryan Kelly and Connor Doherty handled the deal for Blueprint.
As Thomes said, “Although we’re sure to see ebbs and flows related to M&A, we believe in the long-term fundamentals of the seniors housing and care sector.” The capital markets will surely improve, and investors lured by the appeal of demographics will continue growing their seniors housing and care holdings throughout the 2020s. The M&A records set in 2022 will almost certainly be shattered in that time, as well. As it currently celebrates 10 years since its founding, Blueprint can probably expect even more transaction activity in the next 10 years.
